SEC NEWS DIGEST

ENFORCEMENT PROCEEDINGS

The Securities and Exchange Commission (Commission) today announced that Knight Capital Americas LLC has agreed to pay $12 million to settle charges that it violated the agency’s market access rule in connection with the firm’s Aug. 1, 2012 trading incident that disrupted the markets.

An SEC investigation found that Knight Capital did not have adequate safeguards in place to limit the risks posed by its access to the markets, and failed as a result to prevent the entry of millions of erroneous orders. Knight Capital also failed to conduct adequate reviews of the effectiveness of its controls.

This is the SEC’s first enforcement action under the market access rule, which was adopted in 2010 as Rule 15c3-5.

“The market access rule is essential for protecting the markets, and Knight Capital’s violations put both the firm and the markets at risk,” said Andrew Ceresney, co-director of the SEC’s Division of Enforcement. “Given the rapid pace of trading in today’s markets and the potential massive impact of control breakdowns, broker-dealers must be held to the high standards of compliance necessary for the safe and orderly operation of the markets.”

Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit, added, “Brokers and dealers must look at each component in each of their systems and ask themselves what would happen if the component malfunctions and what safety nets are in place to limit the harm it could cause. Knight Capital’s failure to ask these questions had catastrophic consequences.”

According to the SEC’s order, Knight Capital made two critical technology missteps that led to the trading incident on Aug. 1, 2012. Knight Capital moved a section of computer code in 2005 to an earlier point in the code sequence in an automated equity router, rendering a function of the router defective. Although this function was not meant to be used, Knight left it in the router. In late July 2012 when preparing for participation in the NYSE’s new Retail Liquidity Program, Knight Capital incorrectly deployed new code in the same router. As a result, certain orders eligible for the NYSE’s program triggered the defective function in Knight Capital’s router, which was then unable to recognize when orders had been filled. During the first 45 minutes after the market opened on August 1, Knight Capital’s router rapidly sent more than 4 million orders into the market when attempting to fill just 212 customer orders. Knight Capital traded more than 397 million shares, acquired several billion dollars in unwanted positions, and eventually suffered a loss of more than $460 million.

The SEC’s order also finds that an internal Knight Capital system generated 97 automated emails that went to a group of personnel. The emails referenced the router and identified an error before the markets opened on August 1. These messages were caused by the code deployment failure, but Knight Capital did not act upon them on August 1. Although Knight Capital did not design these messages to be system alerts, they provided an opportunity to identify and fix the problem before the markets opened.

The SEC’s order charges Knight Capital with violating the market access rule in the following ways:

Did not have adequate controls at a point immediately prior to its submission of orders to the market, such as a control to compare orders leaving the router with those entered.

Relied on financial risk controls that were not capable of preventing the entry of orders that exceeded pre-set capital thresholds for the firm in the aggregate.

Did not link the account that received the executions on August 1 to automated controls concerning the firm’s overall financial exposure.

Did not have adequate controls and procedures for code deployment and testing for its equity order router.

Did not have sufficient controls and written procedures to guide employees’ responses to significant technological and compliance incidents.

Did not adequately review its business activity in connection with its market access to assure the overall effectiveness of its risk management controls and supervisory procedures. Its assessment largely focused on compiling an inventory of existing controls and ensuring they functioned as intended, instead of focusing on such risks as possible malfunctions in its automated order router. The firm also reacted to prior events too narrowly and did not adequately consider the root causes of previous incidents.

Did not have an adequate written description of its risk management controls.

Did not certify in its 2012 annual CEO certification that Knight Capital’s risk management controls and supervisory procedures complied with the market access rule.

The SEC’s order also charges Knight Capital with violations of Rules 200(g) and 203(b) of Regulation SHO, which require the proper marking of short sale orders and locating of shares to borrow for short sales. The SEC’s order requires Knight Capital to pay a $12 million penalty and retain an independent consultant to conduct a comprehensive review of the firm’s controls and procedures to ensure compliance with the market access rule. Without admitting or denying the findings, Knight Capital consented to the SEC’s order, which censures the firm and requires it to cease and desist from committing or causing these violations.

The SEC’s investigation was conducted by staff in the Market Abuse Unit including Jason Burt, Carolyn Welshhans, William Max Hathaway, and Ainsley Kerr. The case was supervised by Mr. Hawke and the unit’s co-deputy chief Robert Cohen. The SEC’s National Exam Program and the Division of Trading and Markets provided substantial assistance. (Press Rel. 2013-222; Rel. 34-70694)

In the Matter of Michael J. Fulcher

The Commission announced the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions against Respondent Michael J. Fulcher (Fulcher).

The Order finds that Fulcher — the former Chief Financial Officer of SJK Investment Management, LLC (SJK), a formerly registered investment adviser headquartered in Greensboro North Carolina — obstructed a Commission investigation by conspiring with SJK’s sole owner and Chief Executive Officer, Stanley J. Kowalewski (Kowalewski), to create fraudulent and backdated leases, which leases Kowalewski subsequently provided to the Commission and about which he provided false testimony.

Based on the above, the Order bars Fulcher from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent or nationally recognized statistical rating organization. Fulcher consented to the issuance of the Order. (Rel. IA-3692)

Delinquent Filers’ Stock Registrations Revoked

The registrations of the registered securities of Bonanza One, Inc., Farallon, Inc., and Ora Electronics, Inc., have been revoked. Each had repeatedly failed to file required annual and quarterly reports with the Securities and Exchange Commission. Thus, each violated a crucial provision of the federal securities laws that requires public corporations to publicly disclose current, accurate financial information so that investors may make informed decisions. The revocations were ordered in an administrative proceeding before an administrative law judge. (Rel. 34-70690)

Commission Grants in Part and Denies in Part Motions to Adduce Additional Evidence by optionsXpress, Inc., Thomas E. Stern, and Jonathan I. Feldman

The Commission granted in part and denied in part motions to adduce additional evidence by optionsXpress, Inc., a registered broker-dealer; Thomas E. Stern, chief financial officer of optionsXpress; and Jonathan I. Feldman, an optionsXpress customer. Respondents each filed a motion requesting that the Commission take judicial notice of a June 11, 2013 settlement between the Commission and the Chicago Board Options Exchange and accept the settlement order as additional evidence in this proceeding. Stern and Feldman additionally sought an order requiring the Division of Enforcement to produce documents related to the CBOE settlement, which Stern and Feldman claimed were withheld in violation of Commission Rule of Practice 230(b)(2). Stern and Feldman also sought leave to re-examine witnesses regarding the CBOE settlement.

In partially granting respondents' motions, the Commission took judicial notice of the CBOE settlement and admitted it as additional evidence, while reserving determination as to the order's ultimate probative weight. The Commission denied Stern's and Feldman's motions to compel other evidence, finding that their motions were both untimely and without merit. Among other things, the Commission found that they had not made the requisite "plausible showing" that the documents they sought contained material, exculpatory evidence. The Commission further denied Stern's and Feldman's request for leave to re-examine witnesses about the CBOE investigation, finding that they had "not shown that there were reasonable grounds for failure to adduce such evidence previously." (Rel. 33-9466)

Investment company orders

Principal Management Corporation, et al.

An order has been issued on an application filed by Principal Management Corporation, et al. The order permits: (a) actively-managed series of certain open-end management investment companies to issue shares (Shares) redeemable in large aggregations only (Creation Units); (b) secondary market transactions in Shares to occur at negotiated market prices; (c) certain series to pay redemption proceeds, under certain circumstances, more than seven days after the tender of Shares for redemption; (d) certain affiliated persons of the series to deposit securities into, and receive securities from, the series in connection with the purchase and redemption of Creation Units; and (e) certain registered management investment companies and unit investment trusts outside of the same group of investment companies as the series to acquire Shares. (Rel. IC-30742)

Self-regulatory organizations

Immediate Effectiveness of Proposed Rule Change

A proposed rule change (SR-FINRA-2013-043) filed by Financial Industry Regulatory Authority, Inc. relating to TRACE fees for Securities Act Rule 144A transaction data has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication of the proposal is expected to be made in the Federal Register during the week of October 21. (Rel. 34-70691)

A proposed rule change filed by Chicago Board Options Exchange, Incorporated relating to continuing education (SR-CBOE-2013-098) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of October 21. (Rel. 34-70692)

A proposed rule change filed by The NASDAQ Stock Market LLC to delay implementation of the dedicated OUCH port infrastructure service (SR-NASDAQ-2013-131) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of October 21. (Rel. 34-70693)

A proposed rule change filed by NYSE MKT LLC for a temporary suspension of those aspects of Rules 36.20-Equities and 36.21-Equities that would not permit Floor brokers to use personal portable phone devices on the Trading Floor due to the unavailability of exchange-provided cell phones beginning on October 10, 2013 until the earlier of when cell phone service is restored or October 11, 2013 (SR-NYSEMKT-2013-82) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of October 21. (Rel. 34-70696)

A proposed rule change filed by New York Stock Exchange LLC for a temporary suspension of those aspects of Rules 36.20 and 36.21 that would not permit Floor brokers to use personal portable phone devices on the Trading Floor due to the unavailability of exchange-provided cell phones beginning on October 10, 2013 until the earlier of when cell phone service is restored or October 11, 2013 (SR-NYSE-2013-69) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of October 21. (Rel. 34-70697)

Notice of Filing Amendment No. 3 to a Proposed Rule Change

The National Securities Clearing Corporation (NSCC) filed Amendment No. 3 to its proposed rule change (File No. SR-NSCC-2013-02) (Proposed Rule Change), as previously modified by Amendment Nos. 1 and 2, under Section 19(b)(1) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 19b-4 thereunder, to institute supplemental liquidity deposits to its Clearing Fund designed to increase liquidity resources to meet its liquidity needs. NSCC also filed the proposal contained in the Proposed Rule Change as advance notice SR-NSCC-2013-802 (Advance Notice), as modified by Amendment No. 1, pursuant to Section 806(e)(1) of the Payment, Clearing, and Settlement Supervision Act of 2010 and Rule 19b-4(n)(1)(i) thereunder. See Release No. 34-69451 (Apr. 25, 2013), 78 FR 25496 (May 1, 2013). On May 20, 2013, the Commission extended the period of review of the Advance Notice, as modified by Amendment No. 1. Release No. 34-69605 (May 20, 2013), 78 FR 31616 (May 24, 2013). On June 11, 2013, NSCC filed Amendment No. 2 to the Advance Notice, as previously modified by Amendment No.1. Release No. 34-69954 (Jul. 9, 2013), 78 FR 42127 (Jul. 15, 2013). On October 4, 2013, NSCC filed Amendment No. 3 to the Advance Notice, as previously modified by Amendment Nos. 1 and 2. Release No. 34-70689 (Oct. 15, 2013). The proposal shall not take effect until all regulatory actions required with respect to the proposal are completed. The Commission will consider all public comments received on the proposal regardless of whether the comments are submitted in response to the Proposed Rule Change, as modified by Amendment Nos. 1, 2, and 3 (File No. SR-NSCC-2013-02), or the Advance Notice, as modified by Amendment Nos. 1, 2, and 3 (File No. SR-NSCC-2013-802). Publication is expected in the Federal Register during the week of October 21. (Rel. 34-70688)

The following registration statements have been filed with the SEC under the Securities Act of 1933. The reported information appears as follows: Form, Name, Address and Phone Number (if available) of the issuer of the security; Title and the number and/or face amount of the securities being offered; Name of the managing underwriter or depositor (if applicable); File number and date filed; Assigned Branch; and a designation if the statement is a New Issue.

Amendments to the Registrant's Code of Ethics, or Waiver of a Provision of the Code of Ethics

5.06

Change in Shell Company Status

6.01

ABS Informational and Computational Material.

6.02

Change of Servicer or Trustee.

6.03

Change in Credit Enhancement or Other External Support.

6.04

Failure to Make a Required Distribution.

6.05

Securities Act Updating Disclosure.

7.01

Regulation FD Disclosure

8.01

Other Events

9.01

Financial Statements and Exhibits

8-K reports may be viewed in person in the Commission's Public Reference Branch at 100 F Street, N.E., Washington, D.C. To obtain paper copies, please refer to information on the Commission's Web site at http://www.sec.gov/answers/publicdocs.htm. In most cases, you can view and download this information by using the search function located at http://www.sec.gov/edgar/searchedgar/companysearch.html.